Deston Brass

Case Study
 Question 1

Use the overhead cost activity analysis in exhibit 5 and

other data on manufacturing costs to estimate product costs
for valves, pumps, and flow controllers

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 Solution 1-Standard Costing Method

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 Solution 1

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 Solution 1-Activity Based Costing

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 Solution 1-Transaction ABC(Material)

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 Solution 1-Transaction ABC(Labour)

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 Solution 1-Transaction ABC(Packaging and
Shipping/Engineering)

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 Solution 1-Transaction ABC(Maintenance and Machine Depreciation)

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 Solution 1-Transaction ABC(Cost Per Unit)

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 Question 2

Compare the estimated costs you calculate to existing

standard costs (Exhibit 3) and revised unit costs
(Exhibit 4). What causes different products costing
methods to produce different results.

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 Solution 2-Comparison of Costs

Different cost systems imply varying ways of assigning Overhead expenses to the line of products, culminating in different
consequences for the profitability of the product line under review. With Respect to ABC, flow controllers incur greater unit
costs per unit because of the high transaction percentages that are associated with receipts and material handling.
Material handling and receiving accounts for 35% of direct costs, entirely altering the appearance of product line profit.

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 Solution 2-Comparison of Costs
It is because of this difference that pumps are "more" costly and flow controllers are "less" expensive when using the old technique as
opposed to using the activity analysis method. This is due to the fact that the typical technique allots overhead as a proportion of direct
labour costs. The fact that the vast majority of direct labour (78 percent of receiving, 78 percent of handling, 73 percent of packing, etc.) is
directed towards flow controllers is not taken into consideration. The overhead they generate is applied across the other two items,
making flow controllers seem to be less expensive than they really are (valves and pumps). On the other hand, only roughly 19 percent of
the direct work is devoted to the manufacture of pumps. Because overhead that should have been given to flow controllers was not
allocated to pumps under this technique, pumps have a lower unit cost as a result of the activity analysis, resulting in reduced unit cost for
pumps.
Comparatively, valves are more costly, pumps are more expensive, and flow controllers are much less expensive when using the updated
technique compared to when using the activity analysis. As a result, the improved technique applies overhead at an absorption rate
determined by the amount of overhead associated with a given piece of material

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 Question 3

What are the strategic implications of your

analysis? What actions would you recommend to
the managers at Destin Brass Products Co?

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 Solution)
It is recommended that the current flow controller manufacturing process may be modified in order to
reduce unit costs of flow controllers as a result of the strategic impact of this investigation. In fact, if
Destin Brass could cut down the number of flow controller (and pump) production runs from ten (and
five) per month to a single run per month, hence standard unit cost will decline.

Furthermore, Destin should consider reducing the number of transactions for receiving and processing
of the flow controllers from the current maximum of 100 transactions. If they could build their facility
so that flow controllers only required 50 percent of those interactions (50), they would be able to
significantly cut their receiving and handling costs, which would in turn lower the standard unit prices
for flow controllers even more.

Destin Brass executes 22 shipments of flow controllers to consumer and distributors at large. Despite
the fact that the case does not specify how many clients Destin Brass has for flow controllers, if they
can reduce the number of shipments that are produced, they will be able to lower the average unit
cost of flow controllers even more.

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 Question 4

Assume that interest on a new basis for cost accounting at Destin Brass
Products remains high. In the following month, quantities produced are
sold, activities and costs were all standard. How much higher or lower
would the new income reported under the activity-transaction-based
system be than the new income that will be reported under present,
more traditional system? Why?

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 Solution 4

Assuming that the quantities produced and sold, as well as the activities and expenses, remain
constant in the next month, the net income reported under the activity/transaction based method
should be no different from the net income recorded under the conventional approach. This is due to
the fact that net income is equal to revenues minus all expenses. It is apparent that the new accounting
method will have no effect on revenues. Furthermore, the overall expenses will not be affected by the
new accounting method. It will simply give a more efficient system for distributing expenses across the
different product line segments. Therefore, the net income should stay the same as it was before. This
is illustrated in the illustration above.

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